The Corporate Transparency Act (CTA), effective January 1, 2024, introduces new and significant reporting obligations for many US businesses. Administered by the Financial Crimes Enforcement Network (FinCEN), the CTA mandates that certain entities disclose detailed information about their beneficial owners to enhance transparency and help to prevent illicit financial activities.

Understanding the Corporate Transparency Act (CTA)

Enacted to curb financial crimes such as money laundering and tax evasion, the CTA requires “reporting companies” to submit Beneficial Ownership Information (BOI) to FinCEN. This initiative aims to prevent anonymous entities from benefiting financially from illegal operations.

Who Needs to Report?

The CTA defines “reporting companies” as corporations, limited liability companies (LLCs), and other similar entities created or registered to do business in the US by filing with a secretary of state or comparable office. This means that while a sole proprietor does not need to file a BOI report, a single member LLC does. The distinction here is often, though not always, whether or not an official business entity registration has occurred.

The Corporate Transparency Act also specifies 23 exemptions, including:

  • Large operating companies with over 20 full-time U.S. employees, more than $5 million in gross receipts or sales, and an operating presence at a physical office within the US
  • Certain regulated entities such as banks, credit unions, and broker-dealers. This is because they are already subject to significant federal or state regulation
  • Inactive entities in existence for over a year, but that are not engaged in active business, and that meet other specific criteria. Don’t assume that because your business has been inactive that you will fall into this category – always confirm.

For the full list of exemptions, refer to FinCEN’s FAQs.

Defining Beneficial Owners

A beneficial owner is any individual who, directly or indirectly:

  • Owns or controls at least 25% of the ownership interests of the reporting company OR
  • Exercises substantial control over the company, which includes roles such as senior officers (e.g., CEO, CFO), individuals with authority to appoint or remove senior officers or directors, and those who make significant decisions regarding the company’s operations or finances.

That means many general partners will likely be considered beneficial owners, while a 2% shareholder in an S-Corp would not. Any individual owner would also be a beneficial owner as well, assuming they have a reporting requirement (again, a sole proprietor who has not created an entity with their state will not).

Reporting Requirements

Reporting companies must provide the following information about each beneficial owner:

  • Full legal name
  • Date of birth
  • Residential street address
  • Unique identifying number from an acceptable identification document (e.g., non-expired driver’s license or passport) along with an image of the document

Additionally, companies created or registered after January 1, 2024, must report information about company applicants as well. This refers to the individual(s) who filed the formation documents or directed their filing.

Filing Deadlines

  • Existing Entities (formed before January 1, 2024) must file their initial BOI report by January 1, 2025
  • New Entities (formed on or after January 1, 2024) must file within 30 days of receiving notice of their creation or registration

Importantly, any changes to previously reported information must be updated within 30 days of the change.

How to File

BOI reports are submitted electronically through FinCEN’s Beneficial Ownership secure system. The filing process itself is straightforward and free of charge. Detailed instructions and resources are available on FinCEN’s website if you need additional assistance.

Penalties for Non-Compliance

Failure to comply with the CTA’s reporting requirements can result in significant penalties:

  • Civil penalties can include up to $500 per day for each day the violation continues
  • Criminal penalties can include fines up to $10,000 and/or imprisonment for up to two years for willful violations

Implications for Businesses and Business owners

Businesses should proactively assess their reporting obligations and take necessary steps to ensure compliance. The CTA’s reporting requirements mean that businesses will now need to:

  • Identify and document their beneficial owners
  • Implement procedures to maintain and update ownership information
  • Ensure timely compliance to avoid penalties